Israel’s Low Productivity Means A Lower Standard of Living

A new study shows that Israel's productivity has fallen behind countries like Greece and Italy who have severe economic difficulties.

By Kochava Rozenbaum

First Publish: 9/8/2013, 12:20 PM

Illustration: Electricity technicians at work

Flash 90

Israel has sunk to the 26th place in developed-world productivity, according to economists from the Taub Center for Social Policy Studies.

A recent study indicates that Israeli productivity is in rapid decline due to long work hours, very low capital investments, and cumbersome bureaucracy.

The Israeli worker's average productivity is $33.70; ranking Israel 26th out of 34 member states of the Organisation for Economic Co-operation and Development (OECD). Even countries with severe economic difficulties, such as Greece and Italy, have higher productivity than Israel.

Productivity is the ratio between the value that an employee produces and his salary cost. The lower the output, the lower the productivity.

Taub Center executive director Professor Dan Ben-David says, "While fewer Israeli’s participate in the labor force than is common in the leading western countries, those who do, work many more hours each year. Their productivity per hour worked is considerably less, and falling further and further behind (in relative terms) the G7 labor productivity.”

The G7 countries include the US, Canada, United Kingdom, France, Germany, Italy, and Japan. Since mid-1970, and the gap between Israel and the G7 productivities have steadily widened in work hours, said Ben-David.

While there are important factors that are idiosyncratic to different business sectors, there are also a number of related economy-wide determinants.

"Capital plays a key role in spurring productivity," Ben-David finds, "and Israel has a major problem."

The problematic level of the country's human capital infrastructure and the multi-decade neglect of its transportation infrastructure puts Israel at the low end of the OECD.

"It should come as no surprise that a country with relatively low national levels of physical and human capital is exhibiting problematic productivity growth at the national level,” Ben-David noted.

On governmental bureaucracy which hinders Israel's productivity growth, Ben-David said that "the country’s small domestic market is concentrated in the hands of too few individuals and it suffers from insufficient competition – a crucial factor in spurring physical and human capital investments necessary for productivity growth. All of these factors combine to yield higher domestic prices that reduce the economic viability and attractiveness of Israel’s economic environment even more.”

And even though over the past decade Israel has emerged as a one of the world's leading technological giants, the professor from the Taub Center remarked that the "very educated young people have alternatives when it comes to employment" claiming that Israel might lose its most educated and talented children of the 'start up nation' as "the national ability to pay a competitive wage erodes."